Filing insolvency claims as joint creditors?
Filing claims under senior facilities agreements with parallel debt structure
The German Federal Court of Justice confirms the option of filing claims to the insolvency table as joint creditors.
The security agent can file the parallel debt in addition to each creditor's claim to the insolvency table and accept payments from collateral and the insolvency quota for all creditors.
The security agent and all lenders together are joint creditors. In relation to each other, the lenders are not joint creditors but rather individual creditors.
The security agent files a claim in the comprehensive amount of the outstanding claims, including interest accrued up to the date on which insolvency proceedings are opened and expenses, mentioning the collateral as subject to a right to separate satisfaction. Each individual lender claims the repayment amount due to it plus interest.
Parallel debt structure as basis for filing claims in insolvency proceedings
In (internationally) syndicated loan contracts, it is standard procedure that the borrowers not only place themselves under an obligation towards the individual lenders to repay the loaned amount but also establish an independent (abstract) debt, also known as "parallel debt", by submitting an abstract acknowledgement of debt to an appointed security agent. This is done to make the lenders' individual claims more tradable and to transfer the collateral only to the security agent, which holds it in trust for the lenders.
The parallel debt always equals the total amount of all of the lenders' secured claims. Thus, payments by the borrower to the lenders automatically reduce the amount of the parallel debt. It is contractually agreed that payments toward the parallel debt also have the corresponding effect on the individual lenders' claims. This means that the parallel debt does not constitute a duplication of actual claims.
Relationship of the individual lenders' claims to the parallel debt
Syndicated loan contracts often stipulate that the rights and obligations of the individual lenders are independently established and exist independently from each other. Thus, in relation to each other, the lenders are not joint creditors but individual creditors.
Due to the structure of the parallel debt, the security agent and all of the other lenders together are joint creditors. Not only all lenders taken together but also the security agent can demand repayment of all outstanding claims, but the borrower is only obliged to perform once (Section 428 German Civil Code).
Problems with filing the parallel debt
If the borrower or guarantor becomes insolvent, the question arises as to whether not only the security agent can register the parallel debt but also the individual lenders can register their outstanding claims. This is often desired to ensure that the claims are easily tradable even after insolvency proceedings have been opened and to have the advantage of an enforceable claim in the event of a possible sale.
However, in actual practice, the actions taken by insolvency administrators and insolvency courts can vary. Problems can arise due to the seeming duplication of the claims caused by the parallel debt because the IT systems used for the insolvency table cannot deal with joint creditors. However, a new decision by the German Federal Court of Justice (judgment dated 5 July 2018 – IX ZR 167/15) has now confirmed the option of filing claims as joint creditors.
Details of filing claims
The decision by the Federal Court of Justice has now clarified that, if a borrower or guarantor becomes insolvent, claims not only can but also should be filed for each lender separately and also for the security agent. The parties can also be represented according to the general rules. It is often the case that the loan documents provide for a power of attorney for the security agent to represent the lenders. Since the documents are usually very extensive and the proof of representation required by courts is usually not sufficient, in a practical sense, it is necessary to procure powers of attorney (sometimes notarised) that explicitly include the right to file claims in order to avoid disputes in individual cases.
When a security agent files the parallel debt, such claim includes the total amount of all outstanding claims, including interest, up to the date on which insolvency proceedings are opened. In addition, the security agent can file its expenses if the debtor in question is to bear them according to the contract or applicable law, e.g. after a default. Examples of this include the expense of enforcing a right (in the amount of the legally permissible fees) or the remuneration of the security agent. As the holder of the collateral, the security agent also claims separate satisfaction. Whatever collateral has not already been reported to the insolvency administrator in advance must be listed in the filing documents.
Each lender files a claim in its own name for the amount to which it is entitled including interest accrued up to the date on which insolvency proceedings are opened.
The lenders' claims are correctly listed in the insolvency table unconditionally and as joint creditors with the security agent. Such agent's claim is listed under the condition of a shortfall after security proceeds (due to the existing right of separate satisfaction).
In the event of joint creditors, the debtor can repay any of the individual creditors at its own discretion (Section 428 German Civil Code). However, it is usually stipulated in the loan contract that, if the borrower or a guarantor becomes insolvent, the insolvency quota can only be paid to the security agent. Having received such payment, the security agent distributes it to the lenders, just as it does when it disburses the proceeds of collateral.
Any Questions? Please contact: Thomas Hoffmann, Andrea Braun or Isabel Giancristofano
Practice Group: Restructuring & Insolvency and Banking & Finance